OPM (Operating Profit Margin)

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OPM (Operating Profit Margin)
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OPM (Operating Profit Margin)

Explanation: Operating Profit Margin (OPM) calculated from EBITDA assesses the efficiency and profitability of a company’s core business operations by measuring the proportion of operating profit (EBITDA) relative to total revenue. It provides insight into how effectively a company generates profit from its primary business activities, excluding non-operating expenses such as interest, taxes and depreciation. A higher OPM indicates robust profitability from core operations, while a lower OPM suggests challenges in generating profits from primary business activities.

Companies with high OPM typically demonstrate strong pricing power, efficient cost management and effective utilization of resources in their core operations. Industries such as technology, pharmaceuticals and software often exhibit high OPM due to their ability to maintain healthy profit margins and efficient operational structures.

Companies with low OPM may operate in industries characterized by thin profit margins, intense competition or high operating expenses relative to revenue. Sectors such as retail, hospitality, and transportation often face challenges in maintaining high OPM due to competitive pressures and rising costs.

To analyse trends in profit margins, it’s essential to track changes in OPM over time and compare them with industry benchmarks, historical performance and peer companies. Increasing OPM trends suggest improving operational efficiency and profitability, while decreasing OPM trends may indicate operational challenges or declining profitability. Evaluating the underlying factors influencing OPM changes, such as shifts in revenue mix, cost structures, pricing strategies or operational efficiencies, provides valuable insights into a company’s financial health and competitive position.

Example: TCS reports an Operating Profit Margin (OPM) of 26.21% as of FY23. This indicates that TCS generates an operating profit equivalent to approximately 26.21% of its total revenue from core business operations before accounting for non-operating expenses. TCS’s relatively high OPM underscores its efficient operational management and strong profitability within the IT sector. Analysing trends in TCS’s OPM enables stakeholders to assess the company’s operational efficiency, profitability trajectory and competitive standing over time.

You can view the quarterly and annual Operating Proft Margin percentage for any company on Radar in the Quarterly Results or Yearly P/L sections.

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